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Trump Win Keeps Emerging-Market Investors Selling in Asia

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November 11, 2016

HONG KONG? Investors dumped stocks, currencies and bonds in emerging Asia on Friday, as Donald Trump's victory in the U.S. presidential election continued to upend markets world-wide.

Stocks ended the day 4% down in Indonesia and closed 2.9% lower in the Philippines. The Indonesian rupiah and the Malaysian ringgit, meanwhile, fell as much as 3% against the U.S. dollar, prompting central banks in both countries to make statements aimed at soothing concerns about the swiftmoves.

Yields on emerging-market bonds rose, with South Korea's benchmark 10-year government bond last at 1.939% compared with 1.821% on Thursday. The yield on a similar bond in Thailand was last at 2.38% compared with 2.3% a day earlier. Bond yields rise as prices fall.

Mr. Trump's election has sparked a rally in U.S. stocks and sent longer-dated Treasurys sharply higher, as investors weigh his likely policy mix of increased fiscal spending on infrastructure projects and greater trade protectionism. Many expect his agenda to spark higher inflation, leading both to the U.S. Federal Reserve raising interest rates more rapidly than previously expected, and a stronger U.S. dollar.

That in turn could lead to a shift in the dynamics that lured billions of dollars into emerging markets earlier this year. For months, low and negative rates in the developed world sent investors to far-flung parts of the globe in the hunt for better returns. Now, with yields on U.S. Treasurys sharply higher, investors could choose to stay closer to home.

"Higher rates in the U.S. will naturally raise the bar for capital flows to emerging markets," said Mirza Baig, head of foreign exchange and interest-rate strategy at BNP Paribas in Singapore. That means investors could sell local-currency debt, pushing yields even higher.

After Mr. Trump's victory in Tuesday's election became clear, yields on benchmark 10-year U.S. Treasurys surged above 2% for the first time since the beginning of the year. On Wednesday, they notched their biggest one-day jump in three years before settling at 2.118% Thursday.

Higher inflation could mean the Fed will raise rates more aggressively. A belief that it would move slowly buoyed sentiment for emerging-market investors earlier this year.

"The previous shallow hiking cycle is probably not going to happen," said Mark Baker, an emerging-market portfolio managerat Standard Life Investments in Hong Kong. "I think there's a narrative around tighter global liquidity conditions that could become more important once again."

In that kind of environment, emerging-market investors could rethink investments in countries that are reliant on foreign capital, like Turkey and South Africa, Mr. Baker said.

Early Friday, currencies in Malaysia and Indonesia, where foreigners own a large chunk of government debt, weakened sharply before recovering later in the day. Foreigners own about 40% of government bonds in Indonesia and just more than 50% of government bonds in Malaysia.

To be sure, many investors believe Asia's emerging markets are sturdier than they were during the so-called tapertantrum of 2013, when worries that the Fed would pull back from its bond-buying program triggered heavy outflows. In India and Indonesia, for example, current-account deficits have narrowed since then.

What's more, the dramatic market fluctuations could prove to be short-lived as markets come to terms with the surprise U.S. election result, traders say, which could create buying opportunities.

Still, investors remain cautious given the uncertain outlook for the direction of Treasurys.

"If Treasury yields continue to march higher, eventually that will put pressure on emerging markets," said Ashley Perrott, head of pan-Asia fixed income at UBS Asset Management in Singapore. "What you think is an opportunity initially might turn into regret."

Moreover, there remains something of a struggle within markets between those who expect Mr. Trump to prioritize his spending agenda at home versus those who think he will move quickly to implementpolicies in line with his antitrade campaign rhetoric.

On one hand, any decline in global trade could hurt growth and thus increase the likelihood of rate cuts in export-oriented economies, including India, China, Indonesia and Malaysia, said Sameer Goel, head of macro strategy at Deutsche Bank in Singapore. Still, rate cuts could accelerate the weakening of some currencies and sustain capital outflows.

Higher rates in the U.S. could also pose a longer-term challenge for emerging markets as the U.S. dollar strengthens. Asian companies rushed to issue dollar-denominated debt before an expected U.S. rate increase, which will become more burdensome to repay. The International Monetary Fund recently warned about the high levels of debt in emerging markets, which could make economies vulnerable to a reversal of capital flows.